Key Man Insurance

Q: Recently, a colleague mentioned that he had bought "key man" insurance for one of his top employees. I didn't want to let on that I didn't really know what that is. Could you inform me? - Murray, New York

A: I could try, but since I am not the insurance expert, I thought I would go to someone who is – Byron Udell, the founder and CEO of AccuQuote. Founded in 1986, AccuQuote (www.accuquote.com) has become one of the leading insurance companies in the country, increasing revenues an average of 40% a year for the past 10 years.

When I asked Udell about "key person" insurance (that is the proper term these days), he gave me this scenario: "Let's say that a business has an employee who is critical to its profitability – someone who is firmly entrenched and important. Someone who is integral and critical to the business. It might be a top salesperson or a manager that is vital to the business."

He went on, "Then ask yourself – what would happen to your business if that employee were to pass away?" If that employee is indeed "key," that is, he or she creates significant revenue, revenue that would take a while to replace, then their loss would likely trigger an economic crisis in your small business.

Enter key person insurance. Think of it as life insurance for your business.

If you do lose a key employee, the policy will pay you for your lost profits, thereby buying you some time to replace the individual and get things back up to speed.

Key person insurance can also serve as an incentive to retain vital employees. Because you can divvy-up the benefits under the policy any way your wish, you can offer part of any proceeds to the employee's family. In that manner, key person insurance can become part of your benefits package.

How much should you buy? Udell says that typical benefits run between $250,000 and $1 million. There are two ways to determine the right amount of key person insurance to buy. The first rule of thumb is to buy 8-10 times the employee's salary. But Udell suggests that the second method is better: Look at the economic value of an employee to your business and ask yourself, "How much money would I lose if something happened to this person?" The answer to that question tells you how much insurance to buy.

I know, you are probably thinking that this all sounds well and good, but buying that much insurance is likely cost-prohibitive. Nope. Udell says that rates for key person insurance are "dirt cheap right now." In fact, rates are 60% less than they were 10 years ago. Back then, to insure a 40 year-old employee with an average 20-year, term key person policy, it would run you about $995. Today, that same policy would run you less than $400 a year.

When I asked if he had any insider tips for someone buying key person insurance for the first time, Byron Udell mentioned two things. First he said, be sure to buy the right amount. Your broker can also help with this determination. Second, "don't overpay." What you want is a broker that works with multiple carriers and can shop your needs around. That will ensure that you are getting the best deal.

What is your most powerful business asset? Most employers say that it is their employees. With key person insurance rates as low as they are these days, it would be shortsighted not to insure your most important business assets.

Today's tip: There are two things I especially liked about AccuQuote. First, you can get an instant online quote at the company's Web site. Second, the company is able to quote some great rates by offering a choice of more than 1,600 products through roughly 140 life insurance carriers.